Nov 26, 2012

Why Not To Supersize

McDonald’s has served “billions and billions” of burgers, but it shouldn’t necessarily be in a hurry to venture into the trillions.

Most companies prefer to keep growing, notes Julian Birkinshaw of the London Business School in an article in Bloomberg Businessweek, but it’s often a mistake, leading to attempts “to seek new sources of revenue in increasingly risky areas.” Instead, suggests Birkinshaw, “A much better approach is to be honest about what you are good at, and to keep on doing it better than anyone else.”

This isn’t what CEOs looking for glory tend to do, but it can work out well.  Birkinshaw cites English retailer WH Smith as an example. “From 2004 to 2012, WH Smith’s net profits grew by 90% while its top-line revenue shrank by 15%,” he observes. “An impressive feat—not glamorous but highly effective, and exactly what the shareholders wanted.”

Peter Drucker believed, as do most economists, that growth must be the goal of all modern economies. But, as we’ve noted, he did notbelieve that it must be the goal of all modern businesses (nor was bigger always better). “Almost every business desires to grow,” Drucker noted in The Changing World of the Executive. “But only a handful have a growth policy, let alone a growth strategy.” This often leads to mindless growth, which is the worst kind, for “by itself there is no virtue in business growth.”

Photo credit: Stefano Costanzo

Drucker did consider growth to be indispensable under certain instances, most notably when a market is growing.  To fail to grow under such conditions risks making a business “marginal,” and that can spell death. “If one’s market grows, one must grow with it,” Drucker explained in Managing in Turbulent Times. “To be marginal means to become extinct.” This is what happened to Chrysler, which, Drucker warned, had made itself marginal by the mid-70s.

But otherwise, the way to judge whether you’re growing in the right way was, in Drucker’s view, simple: “Any growth which, within a short period of time, results in an overall increase in the total productivities of the enterprise’s resources is healthy growth. It should be fed and supported. But growth that results only in volume and does not, within a fairly short period of time, produce higher overall productivities, except for the shortest of start-up periods, is degenerative if not pre-cancerous.”

Simple—but not, of course, easy.

Does your organization have a growth policy (as opposed to a growth strategy)? If so, what does it mandate?

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